David Prosser: Insurers must help us plan for the future

Outlook: Andrew Moss has an enticing proposition for any politician, whatever his party, who is concerned about the spiralling cost of the welfare state.

The conclusion of a study conducted by Mr Moss, the Aviva chief executive, in consultation with Alistair Darling, is that the insurance industry could take responsibility for £17bn of social benefits out of the public sector every year. That would be a 5 per cent reduction in the budget for healthcare, pensions and other social security expenditure – which is not to be sniffed at during any stage of the economic cycle, but manna from heaven at a moment such as now with Britain's public finances mired in debt for a generation to come.

Let's leave the ideological debate for another day, other than to note the irony of a Labour Chancellor collaborating on a study which essentially proposes the privatisation of a chunk of the welfare state. More practically, could the insurance industry deliver on such a promise, and what help would it need to do so?

To be frank, its record so far has been pretty dismal. Despite successive governments, both Labour and Conservative, spending hundreds of billions of pounds on tax relief for private pension contributions, the take-up of products such as personal pensions has been poor. And most of the plans taken out are tiny.

Almost everywhere you look, take-up of insurance industry welfare solutions – from life cover to health insurance to income protection – is in decline as people cut back because of the recession. It hardly helps that insurers, despite emerging from the credit crunch relatively unscathed, are not widely trusted following decades of mis-selling scandals.

And yet, it is clear this country's social security budget is not going to be able to sustain the demands that will be placed on it in the years ahead. The big problem is a demographic one: every year our ageing population has fewer people of working age to support those who have retired. In addition to the pensions timebomb this social change has planted, a second huge cost is looming: as people live longer the cost of long-term care is soaring and will continue to do so. Health spending too, is rising rapidly, and not just on those of pensionable age.

Other problems are more cyclical – the cost of unemployment, say – but no less critical at certain times (such as the next couple of years). The take from direct taxation, let alone National Insurance, does not begin to cover these needs.

There will always be a sizeable chunk of the population that is either unable or unwilling to insure privately for benefits the state safety net provides, however meagre that protection may be. But the good news is that even a small increase in private provision could lead to big savings for the state: at an annual cost of £340bn, even a 1 per cent cut in this sort of social spending would represent a £3.4bn saving for the Treasury. Remember, Mr Moss reckons that 5 per cent is the target to aim for.

Inevitably, there are going to have to be both carrots and sticks to persuade people to take greater responsibility for their futures. For example, we're going to need to rethink the dogma that saw tax relief on private medical insurance abolished, and we can't expect those who opt out of the state social security safety net to pay as much towards maintaining it as those still covered. At some stage, the word that all politicians fear – compulsion – is going to raise its ugly head. We are already moving towards compulsion on private pensions, but there will be other areas where this shift takes place, most notably on long-term care provision.

Nor can the insurance industry be allowed to make hay from this trend. If insurers want people to buy more of their products, standards have to improve and the sort of sales commission-driven scandals we have had in the past must not re-occur.

One additional issue that Mr Moss makes himself in this report is capital security: if people are depending on policies for their future, they must be confident their insurers have the resources to pay claims whatever happens to the economic and financial climate. The insurance industry may need help to ensure that this is the case.